Was Friday a buy-on-the-dip rally or just the obligatory bounce before more selling? If I had the answer to that question I wouldn’t be here typing this, I would be in New York leveraging my portfolio. As you know I am not a big fan of speculation, nor acting as if I know what will happen in the coming week in the markets. We all make investments base on what we know and then forecast forward what we believe will transpire. The key to being successful as an investors is knowing when to admit you are wrong in your beliefs. Thus, the old adage of cut your losses, and let your profits run. With that in mind, it is Monday and we are once again looking at a new trading week with new opportunities looking forwards.
- Will the broad indexes follow through on the bounce produced on Friday? That makes the first objective of the week which direction do we go. If we follow through on the upside you are likely to see more money flow into the markets overall. The major indexes are the most logical set ups on the week. An example of this would be the S&P 500 index which closed at 1515 on Friday. That is the previous support and/or resistance, and a solid move above that level again would establish the upside opportunity for the broad index.
- The next step would be to dig into the S&P 500 index and define the upside leadership. On Friday that came from Telecom, Basic Materials, Financials, Technology and Energy. If IYZ, XLB, XLF, XLK and XLE follow through on the upside they would present opportunities to add to our portfolio.
- Digging further into the sub-sectors or stocks to find the leadership within each of those sector leaders from Friday would provide us with even more opportunities. I have been scanning the components that show the most promise looking forward. Not much is jumping off the list, but I have added a few of them to the research Watch List and/or the corresponding models.
The “Great Rotation” – the new phrase being tossed around Wall Street refers to the move of money from bonds to stocks as interest rates rise along with equities. Of course we cannot leave out the additional cause for interest rates rising being inflation. The inflation concern comes from the Free-Money Fed policy. The bigger question relates to the validity of this belief. As you know, only time will tell us the correct answer. However, one major concern is rising interest rates and the threat to holding long dated bonds. I have two beliefs relative to this topic to share:
- Treasury bonds are oversold short term and the opportunity is on the long side of TLT more than the short side with TBF. Thus, I would be very cautious with any short positions and I tightened my stops to protect the position near term. If the bounce occurs in TLT it will be not last long term, but it will present a trading opportunity.
- The longer term outlook for bonds is negative. It is hard to believe that inflation is going to become a big issue going forward. After all, how many times have analyst called the great bond correction wrong over the last two years. As a broken clock is right twice a day, these analyst will be right in time. That said, it is important to watch for the signs that the longer term trend is heading lower. The weekly chart is moving sideways currently on TLT, but a break below $110 would shift the trend to the downside long term. You have to be patient from a long term perspective, but you can trade the shorter term swings up and down as defined in #1.
The other issue facing investors this week is the budget cuts that Congress can’t agree on. The sequestration terminology is out in full force, but the bigger question is one of sentiment. There is more danger from investors reacting to the lack of a decision than the forced cuts. In fact, spending will still rise for the 2013 fiscal budget year, despite the cuts. Regardless, we will have to see how the impact of this plays out this week.
This promises to be a busy week, more from the activity outside the market than the fundamental data impacting investor sentiment. Set you your parameters and stick to your plan.